Measuring Entrepreneurship- Lies, damn lies and statistics. Blog #16

British Prime Minister Benjamin Disraeli is reputed to have said that there were “three kinds of lies – lies, damn lies and statistics” as a sort of tongue in cheek way of advising caution when interpreting numbers. A case in point is entrepreneurship statistics.

Entrepreneurship is fallingThere have been a series of reports in Canada (and around the industrialized world) deploring the decline of entrepreneurship. A recent one from the Fraser Institute compares the rate of entrepreneurship in a number of countries in the periods 2001-2007 and 2008-2014. For Canada the decline was 8.5%, for the US 18.6%, for Britain 7.5% and or Australia 20.3%. A long article in Forbes Magazine has the title ”Why US Entrepreneurship is dying.” It quotes reports from the National Bureau of Economic Research showing that start up activity has been slowing down in the US for three decades. A recent article in Aspire Canada has the title “ Is Canadian Entrepreneurship Vanishing?”

Various explanations for this decline have been put forward. The Forbes article places the blame on large student loans, making potential entrepreneurs more risk averse. A recent article in the Globe and Mail believes that demographics is to blame – the aging of the population and decline of the number of potential entrepreneurs in the prime age group of late 20’s to early 40’s. Another explanation is the lack of equity funding compared with the US.

Entrepreneurship is rising

On the other hand, data from the Global Entrepreneurship Monitor – the world’s largest study of entrepreneurship, tells a different story. In Canada, for example, the rate of entrepreneurship (measured as the TEA Index of total early stage entrepreneurship activity) has increased from an average of 8.6 (for 2002-2006) to 15.1 (for 2013-2017), almost doubling. In the US the numbers have gone from 11.2 (average of 2002-2006) to 12.9 (average of 2013-2017). That’s not such a big increase as Canada, but it’s definitely not a decline. Australia shows a similar increase from 11.9 (average for 2003-2006) to 13.2 (average for 2014-2017).

What’s going on?The first thing to note is that the two groups are looking at different sources for their data. The “falling” group looks at company registrations, where a new company has been formed. The “rising” group look at actual activities, what percentages of the adult population are actually involved in entrepreneurial activity, whether the activity is part of a registered company or not.

But what could be behind this? A very likely explanation is the gig economy. A report by Randstat Canada (the largest staffing company in Canada) says that 30% of the Canadian workforce is already in “non-traditional” jobs, including part time work, temporary work, contract work, and freelance work, self-employed or unpaid work. This number has increased significantly in recent years, and is expected to rise to 45% by 2020 according to Intuit Canada. A report from Ryerson University found that over 50% of all new Canadian jobs involve “non-standard” work arrangements. Very similar numbers are predicted for the US.

One of the problems with dealing with this issue is the lack of an accepted terminology. Many almost similar terms are used, including gig economy, sharing economy, digital platform economy, and others. The Organization of Economic Cooperation and Development (OECD) has resorted by defining non-traditional work arrangements by what it is NOT – “It is not full time, dependable employment with a contract of indefinite duration.”

There is a theoretical underpinning to this change. Ronald Coase won the Nobel Prize in economics by explaining that firms exist to minimize transaction costs. It was cheaper for General Motors (for example) to assemble all the materials to make a car than to contract with others to do the same thing. That was then. Now the computer revolution has made it much easier and cheaper for firms to do work by contracting with freelancers, and outsourcing significant parts of their activities. Also, it is easier for people to find work using apps such as Uber, Airbnb, Handy and TaskRabbit that trying to find full time employment. And perhaps they value the flexibility as well.

ConclusionIt looks very likely that we will see further increase in entrepreneurial activity in Canada. It remains to be seen how much of this is done through registered companies and how much of it is done on a freelance or sole proprietorship basis.